A leading provider of integrated communications and printing solutions, R.R. Donnelley & Sons Co. (RRD) reported fourth quarter 2010 earnings, on a non-GAAP basis, of 51 cents per share, beating the Zacks Consensus of 46 cents per share. Earnings increased 10.9% year over year from 46 cents reported in the prior-year quarter.
Revenue
Revenues increased 4.8% year over year to $2.71 billion and was above the Zacks Consensus Estimate of $2.66 billion. Fourth quarter revenue growth was impacted by an unfavorable foreign exchange and lower paper sales, which was fully offset by the acquisition of Bowne.
Net revenues comprise U.S. Print and Related Services revenues (74.8% of total sales), which increased 5.3% year over year to $2.02 billion due to the acquisition of Bowne, a rise in volume in logistics, financial print and commercial print, partially offset by price declines across most products and services, as well as lower paper sales.
International sales (25.2% of total sales) increased 3.5% to $682.4 million, primarily attributed to Bowne acquisition, partially offset by unfavorable foreign exchange rates. International sales were driven by increasing volumes in Asia and Latin America, partially offset by persisting pricing weakness.
Operating Performance
Gross margin decreased to 23.1% in the quarter from 23.3% in the year-ago quarter due to continued pricing pressure and higher pension and other benefits-related expenses, partially offset by increased volume, a higher recovery on print-related by-products and lower incentive compensation expense.
SG&A expense increased to 11.8% of total revenue in the quarter from 10.9% in the year-ago quarter, primarily due to the acquisition of Bowne, higher provision for bad debts and higher acquisition-related expenses, partially offset by lower incentive compensation expense.
Operating income on a non-GAAP basis declined 1.6% year over year to $174.3 million in the quarter. As a result, operating margin fell to 6.4% from 6.9% reported in the year-ago period.
Segment wise, U.S. Print and Related Services operating margin increased to 9.6% from 9.0% reported in the year-earlier quarter, due to lower incentive compensation expense, increased volume and a higher recovery on print-related by-products, which more than offset the impact of continued price erosion.
International operating margin of 8.0% in the quarter was up from 6.2% in the year-ago quarter, due to increased volumes, but was partially offset by continued price erosion.
Balance Sheet
R.R. Donnelley exited the quarter with $519.1 million of cash versus $731.6 million in the previous quarter. Long-term debt stood at $3.53 billion at quarter end compared with $3.41 billion in the previous quarter.
Recommendation
Management did not provide any guidance. The Zacks Consensus Estimate for earnings per share is currently pegged at 41 cents for the first quarter 2011.
Donnelley is witnessing stabilization in demand, increase in volumes and new customer wins; however, foreign exchange movement and lower paper sales are expected to create significant headwinds. We maintain our Neutral rating on a long-term basis (6-12 months). Currently, R.R. Donnelley has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).
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